Centrica plc’s £750m rights issue shows why National Grid plc is the better pick

Shares in utility giant Centrica (LSE: CNA) are plunging this morning after the company announced that it would be issuing 350m shares — or around 7% of its current issued share capital — to institutional investors to raise funds to reduce debt, fund two acquisitions and accelerate the group’s restructuring strategy. The company wants to raise at least £750m from the issue, although at the time of writing 350m shares are worth around £745m excluding fees. Based on yesterday’s closing price, Centrica was on track to raise £800m but after today’s declines, it will have to make do with around £50m less than expected. 

Centrica will use £350m of the funds raised to complete two acquisitions, and the remainder will be used to lower the company’s debt. These actions are all part of the group’s renewed focus on its customer-facing strategy. This strategy will see the company reallocate around £1.5bn of capital from exploration and production to customer-facing businesses over the next four years.

And if all goes to plan, Centrica hopes that this strategy will deliver sustainable adjusted operating cash flow growth of 3% to 5% per annum over the period from 2015 to 2020. Alongside the additional investment in the customer-facing business, Centrica has also embarked on a cost-efficiency programme that’s expected to deliver £750m per annum in cost savings.

An odd move

Centrica’s decision to issue 350m new shares raises more questions than it answers. Indeed, the company wants to use some of the funds to pay down debt to ensure that the group maintains its investment-grade credit rating. 

However, Centrica is also spending around half of the funds on acquisitions. Surely, if the company were so serious about maintaining its investment-grade credit rating, it would ditch the acquisitions and focus solely on debt repayments? 

The very fact that Centrica is still pushing ahead with these acquisitions shows that the group is struggling to grow organically, and shareholders are footing the bill.

A better investment 

On the other hand, National Grid (LSE: NG) isn’t struggling to grow, and it’s likely the company will never fall into the same high-debt low-growth trap Centrica has fallen into.

National Grid owns and runs the majority of the UK’s electricity infrastructure, and as a result, this is one company with an enormous competitive advantage and economic moat around its business.

The company has virtually no competitors, and it’s unlikely it will ever have to deal with any. What’s more, National Grid deals mainly with other businesses, not consumers, on long-term contracts giving the company visibility over future cash flows. All in all, National Grid displays all the essential characteristics of Warren Buffett’s “business moat”. And for this reason, National Grid’s shares are one of the most reliable investments on the market today.

At present, the company’s shares support a dividend yield of 4.4%. The payout is covered one-and-a-half-imes by earnings per share and is expected to rise in line with inflation over the next three years. The shares currently trade at a forward P/E of 15.6.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.